Charge It: The True Cost of this Shopping Mantra

For women, it may be the latest pair of beautiful shoes. For guys, it may be a box of favorite cigars. Either way, the “buy now pay later mentality” that most Americans have means pulling out the plastic and worrying about how they are going to pay for the purchases later. When you learn how much that pair of shoes or box of cigars truly costs you if you don’t pay off your credit card bill in full at the end of the month, you may no longer think that purchase was worth it.

The Balance Carryover

You already know if you only pay the minimum amount due on your credit card, you’re paying interest on your purchases. Think of the interest as an increase to the price of the item. So instead of a pair of shoes taking you one month to pay off, making a minimum payment can take you up to a year to pay off. Don’t believe it? Take a look at how the math plays out:

Let’s assume you have a relatively small credit card account balance of $1,000. If your credit card interest rate is 10 percent and the minimum payment is 2 percent of your balance, it will take you seven and half years to pay off the $1,000. And, that’s assuming you make no further purchases with your card to increase the balance.

Of course, if your rate is higher, the length of time to pay it off increases. At 15 percent, the same $1,000 balance stretches to 10 years, and at 20 percent, 18 years. Eighteen years to pay off what amounts to 10 pairs of shoes isn’t really worth it, is it?

Zero Interest Game

If you play the zero percent interest game, consider this: When you make a payment on a credit card that has a zero percent interest offer, it will go first toward the balance with the zero percent interest and then toward the 15 percent interest balance, meaning any remaining balance will incur the 15 percent interest charge.

For example, if the minimum payment due is $100, but you pay $150, $100 of your payment is applied to the zero percent purchases and the remaining $50 goes toward reducing the balance that is accruing 15 percent interest.

Cash vs. Credit

It’s no surprise that in the light of a recession and credit crunch, more consumers are making cash purchases over plastic ones. It becomes a mindset – an approach to buying – where cash purchases make you stop and think about what you’re buying and whether or not you can afford it… right now.

On the other hand, sliding the credit card across the counter doesn’t hurt as much until the bill comes in. Even studies support that your brain processes these purchases differently. Instead of using a credit card, start using cash or a cash equivalent (debit card), so you won’t feel the hangover of your own personal credit crunch the next morning.